An Application of Yield Management for Internet Service Providers

In this paper we study strategies for better utilizing the network capacity of Internet Service Providers (ISPs) when they are faced with stochastic and dynamic arrivals and departures of customers attempting to log-on or log-off, respectively. We propose a method in which, depending on the number of modems available, and the arrival and departure rates of different classes of customers, a decision is made whether to accept or reject a log-on request. The problem is formulated as a continuous time Markov Decision Process for which optimal policies can be readily derived using techniques such as value iteration. This decision maximizes the discounted value to ISPs while improving service levels for higher class customers. The methodology is similar to yield management techniques successfully used in airlines, hotels, etc. However, there are sufficient differences, such as no predefined time horizon or reservations, that make this model interesting to pursue and challenging. This work was completed in collaboration with one of the largest ISPs in Connecticut. The problem is topical, and approaches such as those proposed here are sought by users. c © 2001 John Wiley & Sons, Inc. Naval Research Logistics 48: 348–362, 2001